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The Credibility Of Fiscal Rules Policy And Business Cycle Volatility

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  • Haryo KUNCORO

Abstract

This aim of this paper is two-fold; first, it studies the impact of fiscal rule policy credibility on output growth stability; second, it compares to discretionary as well as automatic stabilizer fiscal policy. Employing quarterly data over the period 2001-2013 in the case of Indonesia, we obtain that the credible debt rule leads to decrease the volatility of output growth while the incredible deficit rule does not have any effect. Both unsystematic and systematic components of discretionary fiscal policy have a stabilizing function. Interestingly, the automatic stabilization tends to induce the output growth volatility. Given those results, we infer that government spending is not a good automatic stabilizer. It seems that the lower ratio of government expenditure to GDP along with improving credibility of deficit rule policy has a smoother effect on the economy. Therefore, they implicitly support expenditure cuts in implementing fiscal adjustment in order to reach fiscal sustainability in the short-run and stable economic growth in the long-run. JEL Codes - E32, E62, H60

Suggested Citation

  • Haryo KUNCORO, 2016. "The Credibility Of Fiscal Rules Policy And Business Cycle Volatility," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 63(2), pages 209-224, July.
    • Handle: RePEc:aic:saebjn:v:63:y:2016:i:2:p:209-224:n:32
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    More about this item

    Keywords

    volatility of output growth; credible fiscal policy; government size; openness;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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